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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required the Secretary of the Department of Health and Human Services to change the payment rates for chemotherapy-related drugs and chemotherapy administration services. These changes followed reports that Medicare payments for chemotherapy-related drugs were much higher than physicians' costs to acquire them, and oncologists' assertions that drug overpayments were needed to compensate for inadequate payments for chemotherapy administration services. In addition, the Centers for Medicare & Medicaid Services (CMS) made changes in billing rules for chemotherapy administration services. However, oncologists have been concerned that even with these changes, Medicare payments may not cover the costs of providing chemotherapy services in 2005. To respond to a Congressional request that we review the adequacy of Medicare payments for chemotherapy-related drugs and chemotherapy administration services in 2004 and 2005, we assessed the changes in these payments and compared the payments to the estimated costs of providing these services.

In summary, we estimate that Medicare payments for drugs billed by oncologists in 2004 and 2005 will decline relative to 2003, while still exceeding physicians' costs for acquiring these drugs, and payments for chemotherapy administration services will increase substantially. Medicare payment rates for the 16 drugs we studied will exceed oncologists' estimated costs for acquiring these drugs by 22 percent in 2004 and 6 percent in 2005. Assuming the same relationship between payments and costs for all drugs billed by oncologists, we estimate that total Medicare drug payments to oncologists will exceed costs by $790 million in 2004 and $202 million in 2005. Regarding chemotherapy administration services, we estimate that fees for almost every service will increase in both 2004 and 2005 relative to 2003, in some cases in excess of 300 percent. We estimate that total payments to oncologists for these services will be 130 percent higher in 2005 than they were in 2003, assuming no change in utilization. These estimates do not reflect Medicare billing changes that CMS announced on November 15, 2004. In its comments on a draft of this report, CMS estimated that these changes will further increase Medicare payments to oncologists for chemotherapy administration in 2005. For example, CMS estimated that payments will increase 5 percent due to revised and added billing codes and 15 percent due to a nationwide demonstration project related to the care and assessment of cancer patients. Further, we estimate that in 2004 Medicare practice expense payments will cover between 24 and 70 percent more of oncologists' practice expense costs than will Medicare payments for all services to all specialties. Though lower in 2005, we estimate that practice expense payments in that year will cover nearly as much or more of oncologists' costs than will payments for all services to all specialties.